Why NVIDIA's Recent Run Shouldn't Come As A Surprise

What Makes The Stock Tick?

After starting out as a chipmaker focusing on the gaming market, the company has transitioned into a maker providing chips and technology for varied applications such as voice recognition and self-driving cars.

Q3 Beat

NVIDIA's third-quarter earnings released on November 10 showed forecast-beating earnings and revenues.

Gaming revenues rose 63.5 percent year-over-year to $1.24 billion. Data center revenues were up a whopping 193 percent to $240 million. Revenues from auto climbed about 61 percent to $127 million.

"We have invested years of work and billions of dollars to advance deep learning. Our GPU deep learning platform runs every AI framework, and is available in cloud services from Amazon.com, Inc. AMZN, International Business Machines Corp. IBM, Microsoft Corporation MSFT and Alibaba Group Holding Ltd BABA, and in servers from every OEM. GPU deep learning has sparked a wave of innovations that will usher in the next era of computing," NVIDIA's founder and CEO Jen-Hsun Huang said.

Consistently Delivering On Bottom Line

A look at the earnings performance since the fourth quarter of 2010 shows that the company has consistently beat earnings per share estimates in all 25 quarters. These are mind-boggling numbers, quite unheard of in an era when the performance of companies are swayed by intrinsic factors as well as extraneous ones. The run up seen in the stock is thus not without a reason. Fundamentals of the company have supported much of the run up.

Does this mean the stock could tank in the eventuality of the company failing to match up to Street expectations? Quiet possibly.

Apple Inc. AAPL, which had a streak of 11 quarters of earnings outperformance from the June quarter of 2013, failed to beat estimates in the March quarter of 2016. The stock fell 6.3 percent in the next session (April 27, 2016), reacting to the earnings miss. After a lackluster performance until mid-May, when it stopped short of a support around $90, a notable pullback from the pre-earnings level of $104+, the stock limped its way back up.

A Potential Earnings Miss Could Hurt Rally

Going by Apple's showing, if NVIDIA's earnings do not measure up to Street expectations, a free fall could ensue. In the eventuality of a retreat, the $112 level could serve as a strong support level.

Citron Research said in a note on Wednesday, the stock could head back to $90 levels, down about 23 percent, as the company faces competitive and gross margin threats.

Even as NVIDIA skeptics question the sustainability of the rally, the stock could fly higher and higher, as long as the company appeases the Street with forecast-beating results.